Portugal Faces 2 Years of Recession

TEHRAN, May 6 (ICANA) – Portugal's caretaker government has signed up to a 78 billion euro EU/IMF bail-out, warning that its terms would push the country into recession for two whole years.

Friday, May 06, 2011 11:45:45 AM

The bail-out package which requires drastic spending cuts and much higher taxes could make Portugal's economy shrink by two per cent in 2011 and 2012, the state-run BBC quoted Finance Minister Fernando Teixeira dos Santos as saying on Thursday.

Dos Santos announced that consumption taxes, but not income tax, would rise, and that Portugal's debt/GDP ratio would keep rising until 2013 before it starts falling. Other measures to be taken include changes to labor market laws and social benefits.

"This is a program aimed at returning to growth and employment," he told a news conference on Thursday.

Portuguese Prime Minister Jose Socrates resigned in March after parliament rejected his minority government's latest austerity plan. He is governing with limited powers until the vote.

Socrates announced late on Tuesday that Lisbon had reached a three-year bail-out agreement to the tune of 78 billion euros with the EU and IMF after weeks of talks conducted by officials from the European Commission, the IMF and the European Central Bank.

The International Monetary Fund will provide 26 billion euros, with the rest of the sum coming from the European Union. Portugal is the third country to succumb in the euro zone debt crisis and seek financial assistance, after Greece and Spain.

Portugal was forced to seek a bail-out after the government collapsed in April, causing its borrowing costs to rise dramatically.

A return to recession will make it even more of a challenge for the heavily indebted Portugal, with the lowest growth rates in Europe for a decade, to regain financial health.